Economy aims to maintain a high welfare (community surplus) rate within the community, which can be achieved through a balance between “marginal social benefit (MSB)” which refers to benefits to society from consuming one more unit of a good and “marginal social cost (MSC)” which refers to costs to society from producing one more unit of a good as depicted in Figure-1. At point B, the MSB and the MSC curves intersect. Thus, the market reaches allocative efficiency state. In the state, an optimal quantity of a product is sold for an optimal price. However, reaching this intersection depends on very strict and unrealistic conditions. The achievement of these outcomes cannot meet in the real world. Since the market cannot allocate resources efficiently because of externalities, it fails. Externalities are the impact of consumption or production on external third parties who are affected even if they are not consumers for the good. Externalities can be positive or negative depending on the impact. If the impact is negative, it is called “negative externality”. It causes the difference between “marginal private cost (MPC)” which refers to costs to producers of producing one more unit of a good and MSC. This situation inhibits welfare maximization and leads to market failure. Demerit goods which are considered unhealthy or damaging in some way to their consumers and third parties. A demerit good can be mentally, physically, and morally harmful such as gambling, and cigarettes. In the consumption of demerit goods, the “marginal private benefit (MPB)” which refers to benefits to consumers from consuming one more unit of a good, lies above the MSB curve as shown in Figure-2, and this situation causes negative externality. It caused by the overconsumption (Q0) of the demerit good that exceeds the socially optimal level of consumption (Q*). This externality creates a market failure and a loss in welfare as shown by the purple shaded area in Figure-2. Since the MSB and MSC are not in equilibrium, society must cover the private benefits of individuals who consume demerit goods.